SEC Regulation of Bitcoin Offerings


Blockchain is "an open, distributed ledger that can record transactions between two (or more) parties efficiently and in a verifiable and permanent way." This distribution helps to safeguard transactions and record keeping. The technology has many different, practical applications. It has been connected with cryptocurrency most frequently, often called bitcoin. The SEC has reviewed several cryptocurrency offerings. So far the SEC has not authorized any. It comes down to a simple question: What is a security and does cryptocurrency qualify?

The Howey Test

The SEC follows a long standing definition called the Howey test to determine what is a security or not. In 1946, the SEC sued William Howey who sold large tracts of land in Florida. Some of the land was sold in real estate contracts to fund future developments. However, Howey didn't file a registration statement with the SEC and the SEC sued him. The case went to the Supreme Court, creating the landmark definition of what constitutes a security for sale: "a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party."

Do Bitcoin offerings meet the Howey test?

As more companies try to sell digital related securities publicly, the SEC is watching carefully. The SEC even spoofed a questionable bitcoin offering to educate investors. The fake investment website was called "Howeycoins" in a nod to the renown court case. In reviewing recent offerings and enforcement cases, the SEC uses the Howey test as a measure. No matter the technology used, if an offering doesn’t meet the existing “Howey” definition then it shouldn’t be registered. 

The SEC has taken a fairly conservative interpretation of the Howey test so far when considering Bitcoin offerings. In a recent noteworthy case the Winkelvoss brothers, early founders of Facebook with Mark Zuckerberg, attempted to list shares of their bitcoin Exchange Trade Fund. The SEC voted 4-1 against the proposal.  Commissioner Hester Pierce was the lone vote in favor of allow the listing and issued a strong statement indicating a digital offering overall could be a registered offering. She encouraged the SEC to allow more similar offerings would stating help to create market oversight and protect investors with clear, regulated disclosure.

Future Digital Offerings

The cryptocurrency market continues to grow. Legitimate bitcoin offerings exist outside of the SEC’s sphere. To aid investors and companies that may try to register a blockchain related offering in the future, the SEC issued official guidance on November 16, 2018. Issuers must comply with existing SEC rules and register digital offerings appropriately. The SEC stated they “encourage and support innovation and the application of beneficial technologies in our securities markets. However, the Divisions recommend that those employing new technologies consult with legal counsel concerning the application of the federal securities laws and contact Commission staff, as necessary, for assistance.“

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